Mayor Ed Lee's housing working group is close to a deal on several policy changes that backers hope will boost the number of affordable units in San Francisco.

The reforms, still in the draft stage but on track to be proposed as legislation next year, will try to make at least a moderate dent in the housing crisis as the mayor tries to reach his goal to build or rehab a daunting target of 10,000 affordable units by 2020. Whether the changes spur the construction of 10, 100 or 1,000 extra new affordable units each year largely depends on how developers take the bait on new incentives.

One proposal would push market-rate developers to build more affordable units by giving them more flexible options to build off-site and join forces with nonprofit developers. Another proposal would let developers build affordable housing for middle-income workers, a group that has been squeezed out of San Francisco. A separate proposal not endorsed by the working group, but which could get a legislative push, would charge developers building luxury condos higher fees that fund the affordable housing stock.

"There's going to be considerable support for a multifaceted approach to provide more affordable housing," said developer Oz Erickson, chairman of the Emerald Fund, who sits on the working group. "We're close on many of these deal points."

The deals would likely help market-rate developers gain political capital for controversial projects, and appeal to progressives who want to keep the pressure on to build more affordable housing quickly. Still, the working group will seek more input from neighborhood groups and city supervisors before plowing forward, leaving plenty of room for contention and tweaks.

San Francisco has the least affordable housing market in the country. The number of rental housing units available in the city meets the needs of just half the 86,000 very- and extremely-low income households in San Francisco, according to a report this fall from the California Housing Partnership Corp. As of last spring, about 1,500 affordable units under the inclusionary housing law were in the pipeline to get built. The city already has about 16,000 affordable units. The real difficulty in delivering affordable units is the exorbitant cost of building any housing in San Francisco — affordable or market-rate — which clocks in at approximately $500,000 minimum per unit.

How the law stands now

Under current law, developers who build market-rate residences in San Francisco have to help pay for or build housing that low- and middle-income residents can actually afford. Those developers have three options: build 12 percent of the below-market rate units on the same site as their market-rate project, build 20 percent of the units on a separate piece of land or pay a fee equivalent to 20 percent to the Mayor's Office of Housing.

More and more, developers are opting to pay the fee, slowing the pace of affordable housing construction.

"Part of the objective here is to find new avenues for developers to actually build units rather than just pay their fees," Council of Community Housing Organizations co-director Peter Cohen said, a member of the mayor's working group.

City officials and housing advocates say housing is far out of reach for households making 120 percent of the median income in part because market-rate developers don't have strong enough incentives to build large off-site affordable projects, which deliver more units sold below market rate. Most developers haven't jumped to build on site because current rules say those projects must be done at the same time and within one mile of their market-rate project – high hurdles to reach, developers say.

Only 3 percent of market-rate projects have funded off-site projects during the last 20 years, according to data from the Office of Housing and Community Development. That sliver of projects, however, have accounted for about 19 percent of the affordable units built under the inclusionary housing law during that period – underlining the need to incentivize off-site development.

The city estimates that it could see 100 more affordable units each year if just 10 percent more market-rate developers choose the off-site option.

"All of the inclusionary options have their merits, but in some cases – where what the city really wants is to maximize the number of affordable units – the off-site option might be the best one. Up until now, it's been pretty difficult to use," said Gabriel Metcalf, executive director of the urban policy group SPUR.

To encourage more off-site projects, the city would let developers take one to two years to finish an affordable project after the market-rate project gets built.

"If you loosen up the timing, it's a carrot. It entices the developers to build the offsite project. It's a big carrot. One year is quite a bit of flexibility," Cohen said.

Under the proposals, developers could also dedicate a certain amount of square footage to affordable housing instead of a specific unit count. They also would be allowed to build the affordable project outside the one-mile boundary, according to an email from the mayor's office sent to working group members.

Merging market-rate and affordable projects
As part of the off-site proposal, the city could also allow market-rate developers to work directly with a private affordable housing providers. The proposal, Erickson's brainchild, says market-rate developers would give a "mutually agreed upon" sum of money up front to affordable housing groups to build off-site housing, he said. The deal would still need to be approved by the Planning Commission.

Developers would be able to lease or sell all of their on-site units as market rate, but pay the difference between market-rate and below-market-rate to the city for 12 percent of the units. This would ensure that developers are still putting up as much money as they are now, and affordable projects can get built more quickly, Erickson said.

"This is an easy change to make that will revolutionize the creation of affordable housing," Erickson said. "The only way we're going to get to 33 percent affordable is to marry an affordable project with a market rate project so the affordable project can use the cash from the market rate project to get the rest of the financing."

Some have caveats and concerns, though.

Donald Falk, executive director of the affordable housing provider Tenderloin Neighborhood Development Corp., said some on the mayor's working group are cautious that a market-rate developer could take advantage of a nonprofit group in this arrangement. Cohen added that the city would need to make sure enough safeguards and regulation accompany this proposal.

Looking for a middle-class solution
Another change in the law being discussed focuses on who the affordable housing can target. People or households who make 55 percent of the city's median income must be able to afford the affordable housing rentals built on-site or off-site by private developers, according to current law. For example, a three-person household renting a two-bedroom apartment would pay about $1,200 a month.

Developers may soon be able to choose to build more affordable units for middle-income residents in what the working group is calling the "dial program." If developers build more affordable rentals, they could be priced up to 90 percent of the city's median income, for example.

"It seems very minor but it's potentially a useful thing so you can have affordable bedrooms priced among a range of low income to moderate income," Cohen said.

The working group expects legislation to pitch the program this winter, and would also target ownership units. Only 14 percent of homes sold in San Francisco are affordable to middle-class residents, compared to 34 percent in San Jose and 40 percent in Oakland, according to SPUR.

Higher fees for luxury housing?
About 16 percent of all market-rate development projects over the past two decades have chosen to pay a fee to the city equivalent to 20 percent of their units. All projects, luxury and not, pay the same proportional fee – a reality that some want to change.

The working group likely won't give this proposal its official blessing, but some on the committee and the Board of Supervisors are calling for an extra fee for luxury development projects.

The end of redevelopment and cuts in federal and state financing for affordable housing has made the city desperate for more money.

Proponents of this change have a symbol: the 8 Washington condo project that voters shot down last year. The developers, Pacific Waterfront Partners, opted to pay the city an $11 million fee instead of building off-site. Some like the Council of Community Housing Organizations say they should have been forced to pay more.

"There's a big difference between paying the fee for an 18-unit condo and a highrise on the waterfront with dozens of condos," said Supervisor Jane Kim, whose separate November ballot measure, Proposition K, will "attempt to ensure" that at least 33 percent of all new units are affordable for low- and moderate-income households.

"There are a lot of questions about whether we're leaving dollars at the table with developers building high-priced units," she added.

Getting higher and denserAs the Business Times reported last month, the city will likely relax zoning laws to let developers build higher or denser if they construct more affordable housing. The so-called density bonus ordinance would now fall in line with state law. The working group expects legislation by February.

Erickson said the move would be "controversial" but would make financial sense for developers.

"You've already paid for the land. You've already paid for the foundations. You don't have to provide any more parking. You've already paid for the lobby and the double staircases. The marginal costs of adding those extra units are much lower," Erickson said.